Fight The Power: Chuck D Sues Universal Music For Hundreds Of Millions In Unpaid Royalties

from the bring-the-lawyers dept

When Eminem's publisher won its lawsuit with Universal Music over how to account for iTunes royalties, we expected a flood of similar litigation, possibly enough to seriously cripple the world's largest record label. Universal Music insisted that Eminem's deal was unique and the case was specific only to that, but so far, we're seeing more and more musicians understanding the implications of the ruling, and filing similar lawsuits. If you don't recall, the battle came down to the simple question of whether or not an iTunes sale was a sale or if it was a license. Amusingly, in almost all other legal contexts, Universal Music claims that when you "buy" a song at iTunes it's just a license. But that proved to be UMG's undoing here -- because many of its old contracts had extremely different terms for royalties on "sales" and "licenses."

Now, there's a good reason for this. Historically, sales were of things like CDs, where Universal had relatively higher production, storage and distribution costs. So for "sales" (of CDs), the royalty to the musician was lower. "Licenses" generally referred to things like licensing a song for a movie or TV commercial. There, labels were willing to share higher royalties with the artist, and for good reason. The costs to the label of such a license were minimal, and licensing was always a relatively small part of the business.

But, of course, iTunes makes for a weird situation. The labels want to pretend it's the same thing as selling a CD, and thus they've been paying the lower royalty rate. But, in other legal contexts they keep claiming that downloading a song from iTunes is not really a "sale" but merely a "license." Thus, the basic legal claim from musicians is that for iTunes sales, they deserve the much higher royalty rate (usually closer to 50%, rather than 10% for sales). The court in the Eminem/FBT case said that iTunes songs were licenses... and thus the higher rates applied.

As we noted, when others started suing, this could lead to somewhere around $2 billion that the labels may need to pay out to artists, and the artists are noticing.

The full filing (embedded below) provides some additional details about UMG's "standard" recording contract. As was detailed earlier this year by entertainment industry lawyer, Martin Frascogna, royalty rates are often just a part of the calculation -- and those royalties tend to come after a bunch of other "deductions." In the Chuck D lawsuit, he notes that the "sold" equation includes a ton of additional "deductions" compared to the "licensed" equation. This includes a "container charge" and an "audiophile deduction." Because of those significant other deductions that only are used on "sales," the claim is the amount owed is even larger than just the discrepancy in royalty rates... and considering that the "container charge" is officially for physical packaging of a CD, it seems pretty ridiculous that UMG has been applying the container charge to digital licenses like iTunes.

In the lawsuit, Chuck D actually reveals the data on how UMG has been calculating royalties... and how they should. It highlights record label accounting at its finest:

As you can see, just as Frascogna explained in his video, the "standard" way of accounting for "sales" is pretty ridiculous. First, there's a "net sales" deduction, which simply deletes 15% of sales from the equation. Then the "container charge" takes out another 25%. So, on 1,000 units -- which brought UMG $700... UMG is able to say that Chuck D is only provided with $80.33... despite a (quite generous for a record label deal) royalty rate of 24% (standard deals start closer to 10%). In other words, the real royalty rate for Chuck D is actually more like 11%, rather than the 24% claimed in the contract.

As the lawsuit notes, the proper way to account for digital royalties would show a much, much higher number: $315.85 for every 1,000 units sold:

The lawsuit goes on to make similar (though with even more number discrepancy) arguments around ringtone royalties, suggesting that UMG is paying $49.89 per 1000 ringtones sold... when the actual number should be more like $660.

UMG is going to be facing a lot more of these kinds of lawsuits, and it's somewhat amusing to see it hoisted on its own petard for being so insistent that iTunes and other digital stores were "licensing" deals. And, for what it's worth, Chuck D has actually been one of the artists on the forefront of embracing the internet and what it allows -- way before almost any other artist. All the way back in 2000, we had an article about him defending Napster in a debate against Lars from Metallica. If anyone deserves to take Universal for "hundreds of millions of dollars," he seems like a good candidate.

This is awesome...

This just proves my point from an earlier article that the labels want their cake and eat it too. They want it treated like IP when it suits them and RP when it suits them. Funny thing is, this time, treating it like IP is coming back to bite them.

First sale

Chuck D's lawyers need to find someone who has "sold" one of his itunes purchased tracks to another user, put him on the stand, and force UMG's counsel to declare the transaction acceptable or not. Either way they lose.

How can they beat this?

I don't see how UMG can possibly win this case. Am I wrong? I think this could end up costing them billions of dollars as more and more artists follow suit. The question is how crippling will it be, not just for UMG but for other major labels who practice the same ridiculous payment structures regarding iTunes?

Do you think this could be the beginning of the final decline for these conglomerate labels? Or will they find enough good lawyers to wriggle away from this somehow? Any thoughts?

FIrst, it's "a massive class action lawsuit", not just one rapper.

Your title is, as typical for you, misleading. At first glance, it's dismissable because whoever this is couldn't possibly be /owed/ hundreds of millions just from Itunes.

Anyway, I don't see this standing up to further scrutiny if turns on some mis-applied distinction between "license" and "sale", when in fact it's selling a license to have a digital file, inextricably tangled verbiage, but quite simple to do. -- Good heavens. How on earth did lawyers ever let that get to be central? Bill Clinton couldn't even be pinned down on the meaning of "is".

While I want artists to get the bulk of the money, this non-logical non-obvious distinction seems shaky, has to be explained at length. The terms are not directly applicable to the facts, it's just a quirk that grew out of new circumstances. I'd say it'll be reversed somehow...

One way to prevent it in future is for labels to form an essentially united front and deny further deals with Itunes. That /may/ be what falls out of this, though just a guess.

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One question, why are the royalty rates in one example at 24% or 18%, and in the other example at 50%? It is sort of confusing why they want to apply a different (and significantly higher) rate to those sales. At 24%, the number is more like $150 or so...

"At first glance, it's dismissable because whoever this is couldn't possibly be /owed/ hundreds of millions just from Itunes."

LOL! You obviously underestimate our legal system. This chick got slammed for 1.5 mill on 24 downloads. Granted it was later overturned, but I wouldn't jump to conclusions just because of the dollar amount!

Wait, wait, wait... what in the name of all that is capitalist is an "audiophile deduction"?

"Man, we've got this suit in Distribution... yeah, he really loves music. Like, REALLY loves it. So we, y'know, we give him a discount and take it out of your royalties because we comped him your album. Yeah. Hope that's OK."

Good points. The contract this was done under was written long before anyone had considered the digital market. It is also hard to see that, in contractual terms, that selling singles "on plastic" would be different from selling singles "as bytes".

I also agree that the "hundreds of millions" title is total, utter bullshit. That would suggest that Public Enemy alone sold something like a billion dollars on Itunes. Reality check says "no f---ing way".

Geez, Masnick. Another anti-copyright article that just shows how much of a pirate you are, how you think artists should work for free, and just give everything away and pray!

Wait... You're saying artists should get paid more for the amount of work they do in creating artistic works? But that doesn't fit with the convenient pigeon-hole into which I've placed you for the purposes of disingenuous IP shilling!

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24% is for singles sold

50% is for Masters Licensed

This is essentially the entire argument Mike was making. They want to pay the 24% pretending an iTunes sale is a sale of a single while claiming in other courts its a licensing. If you look at it as a license there, it would actually be the 50% royalty agreement.

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One question, why are the royalty rates in one example at 24% or 18%, and in the other example at 50%? It is sort of confusing why they want to apply a different (and significantly higher) rate to those sales. At 24%, the number is more like $150 or so...

Explanations anyone?

Thought that was explained... but...

24% is PE's negotiated royalty rate on sales. The 18% is because there are various deductions negotiated into the contract, which are generally used to cover the "costs" associated with physical production and distribution. In this case, the audiophile deduction knocks the 24% down to 18%.

> The contract this was done under was written long before anyone had considered the digital market.

The copyright law was written long before anyone had considered the digital market. Yet it's the same people you're desperately trying to defend who are willing to keep it alive and enforce it in any way possible [when it suits them].

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MAFIAA does not like to pay the Artists and rip off Artists all the time.I refuse to support any Artist who signs with RIAA/Big Labels.Once they sell out I am gone and they are from my library of physical vinyl,cassettes, and CD's.

I'd love to see these suits bankrupt the record labels. I'd love it even more if we could get a federal agency to investigate a label or studio for their fraudulent business practices but we know that won't happen since the Feds are in the labels'/studios' back pockets.

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originally created to compensate the labels for the cost of developing new technology

Ha, so it should be completely abolished, then.

By this logic, the labels should give an additional 25% royalty to iTunes, since they were the ones who developed the platform.

The label's haven't "developed new technology" in the last 20 years. All they've done is let other people spend money to invent the technology and platform, then try to criminalize it if they're not paid enough.

Umm, I am not saying it is not enforceable, I am saying that the nature of what is being sold really isn't in line with what Chuck D is claiming. Licensing was intended for things like use in movies, commercials, things like that. Sales of the music (even as it is sold under license) is part of the sales of music, not part of licensing.

It seems to be more of a grab for money and less about really stating the truth, and sadly the courts in the past seems to have agreed with this twisted view.

At first glance, it's dismissable because whoever this is couldn't possibly be /owed/ hundreds of millions just from Itunes.

This is Chuck D, of Public Enemy, one of the best selling rap artists of all time. It's not inconceivable that the total amount of MP3's bought from iTunes (and other online distributors, like Amazon) adds up to a billion tracks over the years.

Anyway, I don't see this standing up to further scrutiny if turns on some mis-applied distinction between "license" and "sale", when in fact it's selling a license to have a digital file

You don't "sell" a license, you "license" a license. And the judge in the Eminem case (which this case is based upon) got it absolutely right. The label's aren't selling product that they manufactured; they're licensing the music for iTunes or Amazon to manufacture their own products (the MP3's). As an analogy, if another label wanted to manufacture CD's of out-of-print Public Enemy material, Universal would license the music, not sell them pre-packaged CD's to distribute.

And, since Universal isn't spending any additional money for manufacturing or distribution, the royalty rates are higher. Unlike items (like CD's) that have a marginal cost, licensing is pure profit.

One way to prevent it in future is for labels to form an essentially united front and deny further deals with Itunes. That /may/ be what falls out of this, though just a guess.

I would guess not. Labels already had to be dragged, kicking and screaming, into deals with digital distributors in the first place - and presented a united front when doing so. They're dealing with iTunes, Amazon, etc. because they know that if they don't, they'll lose half of their income.

And it's not like the labels haven't tried to open digital music stores. Those all failed, because the labels' decision-makers were terrible businessmen. They tried pushing DRM-riddled, limited-time (tracks "expired" after 30 days), high-cost ($3.50/track) music onto consumers, and nobody bought it. Look at the history of Pressplay and MusicNet.

Basically, the big labels should be kissing iTune's ass for saving their businesses.

And if you're not a big label, I don't see how you would have a problem with the online distributors. The rates you're getting from those guys will be significantly higher than royalties from the recording industry. Plus, you don't need to sign away your copyrights, like you do in order to get a record deal.

Sales of the music (even as it is sold under license) is part of the sales of music, not part of licensing.

I used this analogy above. If another record label (say, EMI) wanted to manufacture CD's of out-of-print Public Enemy material, Universal would grant them a license to do so.

And Chuck D (and company) would get 50% of that licensing deal.

It seems to be more of a grab for money and less about really stating the truth

It amazes me that you would say this about Chuck D, and not the record labels. I mean, that's really astounding. "A grab for money" and not really "stating the truth" are what major labels have been doing, against artists, for nearly a century.

What is it with you A.C.'s? Whenever the discussion is about non-commercial file sharing, the refrain is "think of the artists." Then, when actual artists are being screwed by record labels, the refrain is "it's just a money grab." And when artists say anything that disagrees with the major-label talking points, the refrain is some variation of "that artist sucks."

You're hardly the first (or the worst) offender, but it is pretty indicative of the absolute disgust that major label defenders have for musicians.

It was Universal and the other labels that argued that itunes sales were part of licensing and not part of traditional sales. They did this because it served their purpose at the time. Chuck D is using their own argument against them. He is agreeing that the sales are licenses to the music, as they asserted, and now that means that they owe him money based on his contract.

Again, they wanted these sales to be considered license agreements, and now they must pay for the unintended consequences of what they made a reality. Shifting the blame to Chuck D and other artists is incorrect. The artists are just taking advantage of something the labels brought on themselves, and rightfully so. It's nice to see the labels on the receiving end of the legal beatdown stick for a change. I hope more artists join this lawsuit and get what they deserve.

What is it with you A.C.'s? Whenever the discussion is about non-commercial file sharing, the refrain is "think of the artists." Then, when actual artists are being screwed by record labels, the refrain is "it's just a money grab." And when artists say anything that disagrees with the major-label talking points, the refrain is some variation of "that artist sucks."

dude..go learn some music history...Chuck D is a pioneer of hip hop and created the very 1st socially conscious rap group in history. Run DMC and Beastie Boys list PE as influential. Public Enemy innovated scratching techniques and introduced new production /lyrical styles to music in general.

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Wait... You're saying artists should get paid more for the amount of work they do in creating artistic works? But that doesn't fit with the convenient pigeon-hole into which I've placed you for the purposes of disingenuous IP shilling!

It just fits with The Masnick's history of shilling for Big Artist. What is a poor little label to do in the face of all this shameless astroturfing?

The court document in the linked article states "...Chuck D individually and as a member of Public Enemy, on behalf of himself and all others situated (plaintiff) vs. UMG Recording Inc."

How is this not an action by Chuck D? Does the fact that he includes others somehow mean he's not instigating it?

"At first glance, it's dismissable because whoever this is couldn't possibly be /owed/ hundreds of millions just from Itunes."

Just like nobody can be /owed/ hundreds of millions because they shared some tracks via Limewire. At least in this case, there's contracts to dispute, not just and assumption of "OMG we must have lost all that money!".

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All Sony.

As a side note, most of Sony's technological accomplishments in the field of audio (e.g. the Walkman, the CD, etc) occurred many years prior to Sony's buyout of CBS in 1987, which is when Sony Music was born.

As I was looking up the timeline for this, I was reminded of something rather interesting. The CD was actually brought to market in 1983. This means that the technology that the big labels are still relying on for their profits, is almost thirty years old.

The bottom line is paying an artist $80 when the record company takes in $700 and promises you 50% is just plain wrong. And adding fees related to manufacturing and distribution when there is no manufacturing costs and Apple apparently does all the storage and ripping is wrong too. (I also remember articles saying that Apple paid record companies 89 cents out of the 99 cents it charges, so some additional money seems to be missing from the equation too.)